Welcome back. We're going to talk about how to pay off a home early. Now, this is
a misconception for a lot of Americans. And in this episode, I'm going to empower
you how to get out of debt whatever your definition is out of debt. Probably 2
to 3 years faster than any method of sending extra principle payments against
your mortgage. Did you hear that? This will get you out of that quicker
and help you become more financially independent quicker than just sending
extra principal against a mortgage. So, I'm going to empower you with some
specific action steps that if you're self disciplined, you will accumulate far
more money using this method than just sending money against the mortgage.
So, I'm Doug Andrew and I've helped literally thousands of people get out of
debt quicker, pay off their home mortgage faster. But they're shocked when I show
them how to do it without sending extra principal payments against their
mortgage. See, the obstacle that we have to overcome is realizing that mortgage
interest for example is not your foe. It actually is your friend. This is how
money works. And I'm going to empower you how you can become your own banker and
get out of debt 2 or 3 years faster than sending that money to the
mortgage company. Because every time you write out a check for an extra $100
against your mortgage, you're in essence saying, "Here mister mortgage
bankers an extra $100 this month don't pay me any interest on this.
If I want this money back off, I'll borrow it back on your terms and prove
there's a need why I should have it." Some sort of stupid, doesn't it? Okay? So, let me
tell you a story. One day, I met with three finance professors at a major
university. And they were teaching their advanced 400 classes and they said, "You
know Mr. Andrew, we teach all of our finance students here that when they go
out and purchase their first home, they ought to try to qualify and take out a
15-year amortized mortgage instead they're a 30-year amortized mortgage." I
looked at him, I said, "Really? Why do you do that?" And they looked at me like, "Duh!?"
Maybe they meant "Doug". I don't know. But they said, "If you'll just bite the bullet
and pay extra principal against the mortgage. A little bit higher mortgage
payment. You'll save about grundle of interest. And you'll have your house paid
off in 15 years instead of 30 years. And now you can set aside that
difference into a tax deferred investment like an IRA
401k. And you'll end up with this much money. I said, "Gentlemen, your finance
professors. Haven't you ever taken the differential between a 15-year amortized
mortgage payment, let's say of this. And a 30-year amortized mortgage payment which
is less. Take that difference. And don't spend it. Use a system to set it aside.
Plus the tax savings. You will achieve during the first 15 years of a 30-year
mortgage versus a 15-year mortgage. Take that difference and sock it away and put
it over here on the side into an account earning compound interest. And I prefer
tax-free. Of course they said, "What's tax-free?" So, I had to tell them about my
favorite instrument which I cover in other episodes. I call it the laser fund.
I said, "Do you understand compound interest and how money works?"
"Hmm, yes." I said, "Well, how do banks and credit unions make money?" They borrow our
money at 1 or 2 percent. So, every million they borrow from us they pay 10,000 or 20,000
and interest. But what do they do with our money? They don't put it in the vault.
They turn it around and invest it or loan it back to us at 5 or 6 percent. So, they're
earning 60,000 on that million. They're only paying us 10 or 20 thousand. How much
more 60,000 than 20,000? Don't say 40,000. No, it's 300%. Let
me put it this way: Would you hire an employee for 20,000 that made
you an extra 60,000? Would you buy a widget machine for 20,000
dollars that made you an extra 60,000? Well, any business owner knows that. That
is a 300% return on employment cost or equipment cost. By
learning how money works, you can become your own banker. So, I showed these
finance professors on an HP 12c calculator. I said, "Let's do this equation."
Because they'd never done the math before. And by taking the differential
between the 30-year amortized mortgage payment, okay? Which was the lower
payment. And the 15-year plus the tax savings which we calculated. And I put it
over here compounding at an interest rate that was double or triple the net
cost after the tax deduction of a mortgage, okay? Because you can deduct the
mortgage interest on a personal residence or even on a non-owner
occupied rental income property. I take the net so if I'm borrowing on a
mortgage at 3% in a 33% bracket, it's only costing
me 2%. A third of that I'm saving in tax. If I borrow at 6,
it's only a net cost of 4. So, if I'm paying a net of 4% on my
mortgage but I'm earning 8% over here on the money I was going to
give the mortgage company, I'm making 100% more than the cost. They
were flabbergasted. There was enough money over here in this side fund to
totally pay off the 30-year mortgage in 12 and a half years. Using the same
money, they were telling their students to apply against the mortgage by a
higher mortgage payment in a 15-year mortgage. I said, "Look, I can get him out
of debt 2 and a half years faster." Now, on a $300,000 mortgage, that was 50
thousand extra dollars that I was able to create for somebody using the 30-year
mortgage and using a side fund versus their method of giving it to the
mortgage company killing their partner. Okay? Their friend. The Uncle Sam because
you can deduct that mortgage interest. And so they were like, "Whoa!" Now you do
have to be disciplined to be able to do this. But if you want to get out of debt
faster and you set it aside over here, you'll have enough money to pay off your
mortgage probably 2 or 3 years sooner than any method of sending extra
principal payments to the mortgage company. Let me tell you why that's
important. So, I've written about a dozen books. And in almost every book, I talk
about this topic. In my very first book, I called it the 25,000
dollar mistake being made millions of Americans. Because they're
missing out on 25 grand. That was on a 150,000 dollar mortgage. I just mentioned
out a $300,000 mortgage, it's a $50,000 mistake. If you're listening to me right
now or watching this episode and you're going, "Oh, I have a $600,000 15-year
mortgage. Or I'm sending extra principal payments to the mortgage company to get
out of debt in 15 years." That's $100,000 mistake in my opinion. You're kissing
100 grand down the drain. Now, other than that, I don't have any strong
feelings on this object.Bbut this is real money, folks.
So, I learned this lesson the hard way. Clear back in 1978, my wife and I built
this beautiful 6,400 square foot 6 bedroom home with cathedral beam wood
deck ceilings. We thought we had the world by the tail. Because we had all
this equity. We built it for 150,000 back in in 1978 and
appraised for 300,000 when we finished. Well, we had some things
that happened to us that happened to everybody. We had setbacks. In 1980 in
Houston Texas during the energy crisis, 16,000 homeowners lost their homes and
foreclosure. 16,000 homeowners didn't all of a sudden
become bad people. They just couldn't make their mortgage payment. Some of them
said, "I've been sending $100 a month against my mortgage, okay?" And
then they lost their job or they got sick or disabled. And they go, "Wow, I
should be way ahead." They went to borrow that back. Now, if you
haven't noticed lenders don't loan you money based upon your collateral. They
will tie up your collateral, your house. They loan you money based upon your
ability to repay. If you lose the ability to repay, they're not going to loan you the
money. Unfortunately I have seen thousands of people who were sending
extra principal payments against their mortgage the wrong way. And when they
lost their job or they got disabled, they could not access that and they washed it.
In 2008, many people had been doing that. They lost every dime.
Their house went down in value. What I learned back in 1982 is that my home
did not pass the liquidity and safety
and rate of return test which I explained in other episodes are the key
elements of a prudent investment. Unfortunately, I could not access that
equity. It was just a number on a sheet of paper a few years earlier. By not
sending extra principle payments to the mortgage company, we were able to go out
and be empowered so that on any piece of real estate I kept my hard-earned equity
separate from the property earning compound interest where it was liquid
safe owning a predictable rate of return. And anytime with an electronic funds
transfer or phone call, I could access that money instead of having to borrow
it back from the mortgage company. I'm out of debt quicker if I want to
accumulate the money and pay it off. But I'm in control. Not the mortgage company.
The key takeaway here is that if you want to get out of debt quick, you want
to get your house paid off, it's not any way shape or form sending extra
principle payments to the mortgage company because you're giving up the
access the liquidity to that. If the house goes down in value, you didn't have
safety of principle. If it's parked over in a safe place, you have that safety. And
you're earning rates of return. Often that are double even triple the net cost
of the mortgage and this is how banks and credit unions make money. They're
conservative but this is how you can become your own banker and get out of
debt quicker. Now, this is a lot to swallow for many people. So, I would
encourage you to explore and learn watch a lot of our other educational episodes
to understand how you can use this to harness the value of these miracles
these marbles of wealth accumulation. So, the key takeaways I want for you to
empower you is to not make the 50,000 or 100,000-dollar
mistake being made by fellow Americans who
think that the best way to get the mortgage paid off is sending next to
principal payments to the mortgage company. Learn how to set aside the money
in a conservative side fund compounding tax-free at a higher rate than the net
cost of the mortgage. And you will get out of debt quicker and faster. But
you'll maintain liquidity if you need the money.
Safety, if the value of your house goes down. And you'll earn more safe
predictable rates of return. And if the house appreciates, that's just icing on
the cake. But you're in control. I really want you to understand how I learned
this lesson. I have my story, it's called my defining moment. Click here and you
can view my story and how I learned these valuable lessons. And also below,
you can click on any of these other resources because I usually share these
insights in my various books and educational materials.